The generation of palm oil mill effluent (POME) alongside with the production of crude palm oil has created environmental issue for the palm oil mill industry in Malaysia due to its polluting characteristics. POME with its high organic content is a source with great potential for biogas production. However, POME is commonly treated using open ponding system just to comply with government regulation without capturing biogas released from the process. Biogas generated from anaerobic digestion of POME can replace palm kernel shell and mesocarp fiber which has higher economic value as boiler fuel; upgraded to be used in gas engine for power generation. It is estimated that net profit of RM 3.8 million per year can be obtained in a palm oil mill with processing capacity of 60 tonnes/hr from electricity generation using biogas produced from POME treatment. This review paper will elaborate on the potential of POME as a source of renewable energy and the challenges faced by the palm oil mills in Malaysia which deters the development of biogas plants in the mill.